The three-day break in crude oil continued to provide support for the Dollar while sending the EUR/USD into a major retracement zone. Based on the main range of 1.5610 to 1.6038, the Euro was expected to see fresh buying on a break back to 1.5825 to 1.5774. On Thursday, this pair reached a low of 1.5783. The close off the low indicates that short-term profit-takers or fresh buyers entered the market. The current set-up suggests a rally back up to 1.5911 to 1.5941.

The next retracement up will have critical ramifications for the longer-term view of the EUR/USD. The new high this week to 1.6038 did not bring strong buying into the market, indicating the possibility of a top. The subsequent break stopped in the projected area. The next move up is critical. Based on the two-day break this market is expected to retrace back to 1.5911 to 1.5941. If the market finds sellers in this zone and breaks, then a secondary lower top will have been made. All that would be needed to turn the trend down would be a break through the swing bottom at 1.5783.

Higher energy prices, poor economic reports, and dropping consumer confidence are three reasons to believe the Euro Zone economy is beginning to weaken. Trichet's decision to raise rates to 4.25% in early July may have been the final blow to the economy.

During Thursday's New York session, the good news from J.P. Morgan helped relieve some of the bearishness which had been building in the Dollar; however, aftermarket news regarding a Merrill Lynch downgrade may be the catalyst to send the Euro higher overnight. Coupled with the Citigroup earnings report on Friday, more bad news can send the Euro into the key resistance zone mentioned earlier. This is the action to look for today.

The high correlation between the Euro and crude oil could be factor on Friday also. The down move in crude may have been too much too soon and a short-covering rally may be due. In addition, option expiration can cause an erratic volatile trade. If crude oil trades higher, it is likely to take the Euro with it.

In summary, watch for the EUR/USD to have bias to the upside on Friday, with an objective of 1.5911 to 1.5941. Citigroup news and crude oil are expected to be the catalysts which could help support a rally.

The USD/JPY traded higher on Thursday as traders welcomed the friendly news from J.P. Morgan and lower crude oil. The news from J.P. Morgan, better-than-expected earnings, helped ease some of the concerns about the banking sector. Traders were relieved as the good news lightened up concerns that credit losses will cut into bank earnings.

Traders flocked to the USD/JPY sending it beyond its expected retracement zone at 105.76 to 106.23. The actual high at 107.08 may have been too much for this market at this time, so expect a retracement down to solidify the recent bottom at 103.76. Based on the short-term range, look for a pull-back to 105.76 to 105.25. Negative news about Merrill Lynch, which came out after the markets closed, may trigger the start of the break overnight. Any bad news from Citigroup or higher crude oil on Friday may break the USD/JPY further into the retracement zone. Buyers will have to show up in this zone or the downtrend will resume.

The GBP/USD has been trading firm this week buoyed by lower crude oil and the higher stock market. Traders have also been relieved that the inflationary news is lessening the possibility of an interest rate cut by the Bank of England.

If support collapses, then look for a retracement to 1.9902 to 1.9842. Additional support comes in on a Gann angle at 1.9908. On the upside, this market is trading slightly above its retracement zone. A trade under 2.0002 is likely to attract selling pressure down to 1.9880. The lack of buyers at current levels is probably the best explanation for a break from current levels.

The USD/CHF rallied sharply higher as the news from J.P. Morgan helped to take some of the bearishness out of the financial sector as traders gained more confidence in the Fed's ability to turn this sector around. Investors have been encouraged to sell Swiss to buy higher yielding assets outside of Switzerland.

Internally, the Swiss Franc is feeling pressure because of an industry report showing that investor confidence in the economy reached its lowest level ever. Traders are looking at this news as a reason to prevent the Swiss central bank from raising rates in the near term. The possibility of a stock market break on Thursday could send the Swiss Franc back to 1.0134 to 1.0123.

The USD/CAD rose on the break in the crude oil market. Although lower energy prices are supposed to be beneficial to an economy, in this case they will adversely affect Canadian exports. After reaching an objective of par, the USD/CAD appears to be oversold. Watch for a retracement rally to 1.0106 to 1.0137. Look for a selling opportunity on this first retracement.

The AUD/USD is feeling pressure from slowing demand. A statement earlier in the week from Reserve Bank of Australia Governor Glenn Stevens also implied that inflationary pressure will ease. Financial traders are now factoring in the possibility of interest rates staying unchanged or moving lower. According to the charts, this market is moving too much too soon and is vulnerable to a correction to .9662 to .9618. Look for a buying opportunity on a break back to this level.

The NZD/USD felt pressure on Thursday from traders reallocating assets out of New Zealand and into the U.S. stock markets. Although the 8.25% yield offered by this country is attractive, traders decided to take on a little more risk for more reward and shifted their assets. Any weakness in the U.S. stock market may turn this market around on Friday.

The charts indicate a break to .7622 to .7589 is likely. As long as the central bank keeps rates at 8.25%, expect long interest in this pair. Any talk of an economic slowdown or any other threat to this interest rate can trigger a massive liquidation. A recent report showed accelerating inflation, which prompted traders to cut back on bets that the central bank would lower interest rates this month.

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